September 17, 2015

For Beginners: How to Invest in Philippine Stock Market?

Before you start investing your money in stock market it is good to know what is a stock market and how does one person gain from investing in stocks.

Stock market is a place or platform where people can buy and sell stocks. When you buy a stock you are buying a share of a company. For example, you bought a stock of Metro Bank – this means that you bought a certain percentage of the company; you now have a share in the company.

Why buy a stock and what is the use of investing in stock? Investing in stock market has two main reasons: first is personal reason and second is economic reason. It is personal reason because investing in stock market is one of ways to grow your money; the economic reason on one hand is that when you are investing in stocks, your investment or money is being used by companies in expanding business by acquiring new capital, expanding operation by hiring new employees, and the likes.

The good thing about investing in stock is that it is cash equivalent. This means that you can convert your stocks into cash by selling it to the stock market. Unlike other types of investment, stocks are secured, legal, and backed by the government. This means that you can convert your stocks into cash in any trading time (Monday to Friday 9:30AM to 3:30PM excluding holidays and fortuitous events).

Before you can buy (or sell) a stock, you need to have a broker. You can check the Philippine Stock Exchange (PSE) website for the list of accredited brokerage firms (http://www.pse.com.ph/stockMarket/tradingParticipants.html?tab=0). There are two ways in which you can trade stock – first is the traditional trading and second is online trading. Traditional trading is having a personal broker; you have to call the broker and say “hi, please buy (or sell) this stock for me”. On the other hand, online trading is having no personal broker; this is how it goes - you go to the online trading website, you login, you search for the stock that you want to buy (or sell), and then you click buy (or sell).

If you are new in stock market, I suggest that you choose online trading. Online trading is recommended for starters because the capital requirement to start trading is lower compared to traditional trading; with only PHP 5,000.00 (USD 100) you can start trading online. Moreover, the good thing about online trading is that you have the control on the stocks over your fingertips. With just one click, you can buy and sell stocks wherever you are as long as there is an internet. For more information about online stock trading, you can check the PSE website for the list of brokerage firms that offers online trading services (http://www.pse.com.ph/stockMarket/tradingParticipants.html?tab=1). You can visit the website of online brokerage firms for instructions on how to open an account. They are also offering free seminars on how to invest in stock market and how to use online trading platform.

The next question is, how do you gain by investing on stocks? You can gain in stock market in two ways: first is by receiving dividend and second is by selling your shares of stock at a higher price. Dividend is like a bank interest, you are entitled for dividend because the company that you invested is using your money to run their business. Normally, a company gives dividend once or twice a year depending on the company’s financial performance. On the other hand, you can gain by selling your shares of stock at a higher price. Let say you bought Company A for only 10 Pesos per Share (let say you bought 1000 shares which cost you 10,000.00 Pesos because 10 x 1000 = 10,000 excluding other cost), you can sell it for 15 Pesos per Share (this will give you a gain of 5,000.00 Pesos because 15 x 1000 = 15,000 excluding other cost) or higher depending on your price; however, like a real world market – when you sell your stocks at very high price no one might buy the stock. Let me give you an equivalent real world example. You are buying and selling cars (instead of stocks) – you bought a second hand car Toyota Vios at a price of 250,000.00 Pesos, now you are ready to sell the car at 700,000 Pesos. Some interested buyers visited your shop and took a look at the car but a lot them said that your price is too high. One month passed but the car is still in your shop; you finally decided to lower the price to 400,000.00 Pesos. An interested buyer came in to check the car – he bid your car for 350,000.00 Pesos; you decided to sell the car since you are gain by 100,000.00 Pesos. The same scenario is also applicable in stock market, the price of stock is market driven – no one can influence the stock price except the buyer and the seller. You will further understand this scenario when you are actually trading stocks.

It is good to note that price of stock depends on the confidence of stock holder (you). If people lose confidence in the company that they had invested, people tend to sell their stocks at a lower price (because they see that no one would buy the stock at a higher price). Factors that affect the confidence of stock holders are news and data.

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